Abu Dhabi's TDIC Sukuk Ltd. proposed $1.45 billion trust certificates issuance program assigned 'AA' preliminary rating.

Summary: Standard & Poor's Ratings Services today said it had assigned its preliminary 'AA' rating to TDIC Sukuk Ltd.'s certificates issuance program, under which it can issue up to $1.45 billion certificates (sukuk al-ijara).

Standard & Poor's Ratings Services today said it had assigned its preliminary 'AA' rating to TDIC Sukuk Ltd.'s certificates issuance program, under which it can issue up to $1.45 billion certificates (sukuk al-ijara). The rating is equal to, and is fully reliant on, the rating on Tourism Development and Investment Company (TDIC; AA/Stable/A-1+). The preliminary rating is based on information as of Oct. 1, 2009. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings.

TDIC Sukuk Ltd. is a Cayman-based special-purpose vehicle (SPV) established for this transaction. The equalization of the program rating with the rating on TDIC is based on the obligation of TDIC to make rental and repurchase payments to TDIC Sukuk Ltd. that in our view should at all times enable the issuer to make full and timely periodic distribution and principal redemption payments on the certificates.

According to the program documentation, the proceeds of the certificates will be used by TDIC Sukuk to fund the purchase of the musataha rights (rights to use and develop) in certain land parcels from TDIC. We understand that periodic distribution payments to the certificate holders will be funded by the rentals paid by TDIC to TDIC Sukuk Ltd. under the lease agreement.

Finally, the principal repayment on the certificates will be fully funded from the exercise price paid by TDIC to TDIC Sukuk under the purchase undertaking. The ratings on TDIC have been equalized with those on the government of Abu Dhabi, which has sole ownership of the company through the Abu Dhabi Tourism Authority (ADTA). Although the Abu Dhabi government has not formally guaranteed TDIC's liabilities, the company has a high-profile policy role in diversifying the Abu Dhabi economy through its real estate and tourism activities. This, coupled with TDIC's operational proximity to the Abu Dhabi government, leads Standard & Poor's to conclude that the likelihood of extraordinary government support is "almost certain" as per our updated government-related entity (GRE) criteria.

The ratings on the Emirate of Abu Dhabi are supported by the government's very strong asset position, which provides significant financial flexibility; the country's high level of political stability and wealth, underpinned by its rich resource endowment; and by policies that reinforce Abu Dhabi's integration with the global economy. The ratings are constrained by the geopolitical risks that all sovereigns in the region face, the limited disclosure on the government's assets, and increasing contingent liabilities arising from the banking system and the UAE's public sector as a whole.

TDIC is one of the largest property developers in Abu Dhabi in terms of land bank. The group started its operations in 2005 and develops projects on behalf of the government, aimed at enhancing Abu Dhabi's tourism industry. TDIC benefits from land grants and other subsidies from the government, which reduces the inherent speculative risk of property development. The group also develops commercial projects and sells developed land to third parties. These activities are more exposed to the market conditions for real estate in Abu Dhabi. Although we believe that there is a good underlying demand growth for properties in Abu Dhabi, market conditions are currently pressured by a recent fall in demand and price decreases. TDIC is also exposed to the inherent construction risk, and the group has a limited track record.

TDIC's financial risk profile is negatively affected by large capital spending on projects over the near term, resulting in significant cash outflows and increased debt levels. However, we believe the credit implications of TDIC's weak financials and short track record in a high risk business pale against the government's history of support for government-related entities. This is evidenced by the absence of any bankruptcies in recent years. For these reasons, and those stated above, Standard & Poor's views TDIC debt as being tantamount to that of the government.

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